Question

Suppose there are two countries, Mexico and Japan. Both countries have an automobile industry, and both industries have external economies of scale.

1. Suppose wages are lower in Haiti than they are in Mexico. So, Haiti’s average cost curve in automobile production is lower than Mexico’s. In the space provided, draw two graphs. In the first, show a case in which global production of automobiles will occur in the most efficient place. In the second, show a case in which global production of automobiles will not occur in the most efficient place.

Answer 1

Answer(1):

From the above diagram we can see that the Production of automobiles in Haiti I measured along the X axis and the production of automobiles is measured along the Y axis. Here, AB is the curve that the represents the optimal production of automobiles in the countries Haiti and Japan/Mexico. However, if the per unit cost of providing wage to the workers is lesser in Haiti, this would mean that the producer in Haiti would be able to save a considerable amount of their costs, which can be further utilized in the production of increased amount automobile goods, and the good that would be produced in Haiti can be sold at considerably lower cost that that sold in Japan because the per unit cost of manufacture is lesser. The curve CD shows the increased amount of the product in Haiti, and the considerable shift of automobiles from Japan.This will result in the global production of automobiles to shift to Haiti owing to quantitatively higher and cheaper number of products.

From the above diagram we can see that the Production of automobiles in Haiti I measured along the X axis and the production of automobiles is measured along the Y axis. Here, AB is the curve that the represents the optimal production of automobiles in the countries Haiti and Japan/Mexico. However, if the per unit cost of providing wage to the workers is lesser in Haiti, this would mean that the overall income/saving of the people of Haiti would go down, and therefore, therefore there will be less demand for other goods and services in the market. This will lead to an overall depression in the economy and the investment will dry up. This will further result in an overall decreased production in the economy. Since there is decreased production, the global automobile market would shift to Japan/ Mexico. Therefore, even though Haiti was economically efficient in the production of automobiles, however, its economic slowdown has forced the global automobile market to other countries.